GCB: Losses reduced

Results Update

For QE31/3/2015, GCB reported a small net loss of RM1.9 million as compared to a net loss of RM8.7 million in the immediate preceding quarter or a net profit of RM5.3 million last year. Revenue decreased by 11% q-o-q or 8% y-o-y to RM442 million.

Pre-tax losses decreased q-o-q mainly due the increased sales volume and selling price of cocoa butter, while sales price of cocoa cake and powder picked up. The higher net gain on commodity future and option contract also contributed to the decrease of loss before tax for current quarter.


Table: GCB's last 8 quarterly results

GCB's profit & profit margin seems to have bottomed. They are both poised for recovery.


Chart 1: GCB's last 41 quarterly results

Financial Position

As at 31/3/2015, GCB's financial position is fairly tight with current ratio at 1 time and gearing ratio at 3.8 times. The high gearing is the result of high borrowings to finance its inventory which is equivalent to 160 days of sales. This maybe due to the nature of business where you may choose to take advantage of low prices of cocoa bean by stocking up or you may choose not to sell processed cocoa products due to lower prices.

Cocoa Prices

As a grinder, GCB processes cocoa beans to yield roughly equal parts butter, which gives chocolate its melt-in-the-mouth texture, and powder, which is used in cakes, biscuits and drinks. For more on cocoa business, check out this link.

As a downstream commodity player, GCB's bottom-line is determined to a large extend by its hedging strategy and the movement in the cash market. If it has not hedged its cocoa bean purchases, lower cocoa bean prices works in its favor. Conversely, if it has not hedged its cocoa butter & powder sales, rising prices would work in its favor. That's what happened in the past few months and it may explain why GCB's bottom-line has improved.

Chart 2: Cocoa bean price chart as at May 22, 2015 (Source: ICCO.org)


 Chart 3: Cocoa price chart as at May 22, 2015 (Source:Tradingeconomics.com)

Valuation

GCB (closed at RM0.84 on May 22, 2015) is now trading at 1.2 times its NTA (of 68 sen as at 31/3/2015). Due to losses incurred, we can;t compute its PE multiple, nor can we compute its DY as it did not pay any dividend. Thus, it is hard to gauge whether the current price is a fair price for this stock.

Technical Outlook

GCB has been on a downtrend since it peaked in 2012. The strong support would be at RM0.40-0.50. Indicators have not given any signal that the stock may be bottoming soon.


Chart 3: GCB's monthly chart as at May 22, 2015 (Source: ShareInvestor)

Conclusion

Based on poor financial performance & tight financial position, bearish technical outlook & unattractive valuation, GCB is a stock to be avoided. It is worth watching for the next 1-2 quarter(s) to determine whether the bottom-line would improve along with recent improvement in cocoa prices. When that happens, GCB's share prices should recover.

Note:
In addition to the disclaimer in the preamble to my blog, I hereby confirm that I do not have any relevant interest in, or any interest in the acquisition or disposal of, GCB.